Financial & Managerial Accounting 17th Edition by Jan Williams ,Susan Haka,Mark Bettner,Joseph Carcello

تمرين 15

Downhill Fast manufactures three ski products: boots, poles, and helmets. The company allocates manufacturing costs lo each product line based on machine-hours. A large portion of its manufactur­ing overhead cost is incurred by the Maintenance Department. This year, the department anticipates that it will incur $250,000 in total costs. The following estimates pertain to the upcoming year:
Carol Safooma. the company's cost accountant, suspects that unit costs are being distorted by using a single activity base to allocate Maintenance Department costs to products. She is consider­ing the implementation of an activity-based costing system (ABC).
Under the proposed ABC system, the maintenance costs wouid be allocated to the following activ­ity cost pools using the number of work orders as an activity base: (l) the equipment set-up pool, and (2) the custodial pool. Of the 2.400 work orders filed with the Maintenance Department each year, approximately 600 relate to equipment set-up activities, whereas 1.800 relate to custodial functions.
Equipment set-ups correlate with the number of production runs associated with each product line. Thus, the equipment set-up pool would be allocated based on the number of production runs required for each product. Custodial services correlate w ith square feet of production space, and w ould be allocated based on the space required to produce each product line. The following table provides a summary of annual production activity and square footage requirements:
Instructions
a. Calculate the amount of Maintenance Department costs that would be allocated to each product line (on a per-unit basis) using machine-hours as a single activity base.
b. Calculate the amount of Maintenance Department costs that would be allocated to each product line (on a per-unit basis) using the proposed ABC system.
c. Are cost allocations currently being distorted using machine-hours as a single activity base? Defend your answer.